Insurance: non-receipt of premium and section 53 of Marine Insurance Act 1906

So far as all marine insurance is concerned, whether placed at Lloyd’s or elsewhere, section 53(1) of the MIA 1906 provides that unless otherwise agreed, the broker is directly responsible to the insurer for the premium.

This statutory provision codified the supposed “legal fiction” that in marine insurance the broker is deemed to have been paid the premium by the insured and to have forwarded it to the insurer, who then loans it back to the broker.

In Allianz Insurance Co Egypt v Aigaion Insurance Co S.A. the Commercial Court appears to have confined to history this “legal fiction” behind section 53(1) of MIA.

Background

For the purposes of the section 53(1) issue, the relevant facts are these. Allianz had sought to reinsure a marine risk with Aigaion through its broker. Allianz sent the first two (of four) instalments of the premium to the broker who subsequently failed to forward them to Aigaion. This constituted a breach of the premium warranty issued by Aigaion, the existence of which the broker had failed to inform to Allianz.

When Allianz sought to recover a claim from Aigaion under the reinsurance, Aigaion contended that the policy had automatically lapsed for failure to comply with the premium warranty.

Decision

On the facts, the court found that in order to cancel the policy for non-payment of premium, it would have been necessary for Aigaion to serve a cancellation notice (which it had not done). Aigaion was therefore liable to pay the claim, less the premium that remained due.

Of particular interest was that the court was also asked to consider whether Aigaion was to be treated as having received the premium instalments by virtue of the “legal fiction” embodied in section 53(1).

The judge commented that “I cannot imagine that an intelligent member of the Lloyd’s marine insurance market looking at the Act in 1906 could have been expected to read the fiction into the section with the consequence that… no policy could ever be treated as invalid for non-payment of the premium because the assured was always to be treated as having paid it”.

Analysis

The decision seems to consign to history the “legal fiction” that is synonymous with s53(1). It also removes the inconsistency between the “legal fiction” behind section 53(1) and the operation of premium warranties. Specifically, it was difficult to see how a broker could technically be in breach of a premium warranty in a marine insurance that requires the premium to be paid before a certain point in time, when according to the “legal fiction” described above, the broker had already paid the premium to the insurer who had then loaned it back to the broker.

As the judge put it, “section 53(1) means what it says and no more”.

Further reading: Allianz Insurance Company Egypt v Aigaion Insurance Company S.A. [2008] EWHC 1127 (Comm)